Main points:
At the FOMC meeting in March 2022, the Federal Reserve officially announced the interest rate increase, and the impact of its follow-up interest rate increase path attracted great attention. This paper studies the interest rate increase cycle of the Federal Reserve in the past 40 years, draws lessons from history, deduces the possible interest rate increase path of the Federal Reserve and its impact on the U.S. economy and capital market from three aspects: the evolution of the Federal Reserve's monetary policy, the common characteristics of the interest rate increase cycle and the macro environment faced by the interest rate increase cycle, combined with the latest monetary policy framework of the Federal Reserve and the current U.S. economic fundamentals.
Taking history as a mirror, the Fed has reviewed the past six interest rate hike cycles
1) in terms of monetary policy, the monetary policy framework of the Federal Reserve over the past 40 years has been updated and evolved, including both use and change. During Volcker's period, the focus of monetary policy was to control inflation, and the policy goal was to control the money supply. During the Greenspan period, the Federal Reserve began to gradually abandon the monetary quantity target and turn to the interest rate as the main operation target of monetary policy. The "Taylor rule" has become an important theoretical basis of the Federal Reserve's monetary policy. During Bernanke's period, he advocated maintaining a certain level of inflation, actively and flexibly responding to changes in U.S. economic policies, and began to implement QE. Yellen period mainly focused on the labor market, paid more attention to employment, and reduced the table for the first time.
2) in terms of the characteristics of the interest rate increase cycle, there are mainly the following common points: first, the overall interest rate increase rhythm is relatively stable, and most of the interest rate increase rhythm is fast in the front and slow in the back. In the first year of the interest rate hike cycle, the Fed raised interest rates more than three times, with strong rhythm and intensity. In the later stage, it weakened slowly, and the overall rhythm was relatively stable, so as to smooth the impact on the economy; Second, during the interest rate hike, US inflation basically maintained an upward trend. After the turning point of inflation data, the tightening cycle of the Federal Reserve ended accordingly; Third, the unemployment rate keeps a downward trend in the process of raising interest rates. When the decline of unemployment rate narrows or rises, the process of raising interest rates will also end; Fourth, in the process of raising interest rates, most of the US economic output gap showed a rebound trend, and in most cases it was greater than 0; Fifth, one to two years after the end of the interest rate increase process, the U.S. economy is likely to decline.
There are six macro backgrounds of interest rate hikes in the past. When raising interest rates in 1982, the United States faced economic recovery under the threat of high inflation, and preventing inflation was the main concern at this time; When the interest rate was raised in 1988, the United States was recovering from the impact of the 1987 stock market disaster. The liquidity put in to save the financial market brought the pressure of rising inflation; When the interest rate was raised in 1994, the cold war ended, and the United States ushered in a relatively relaxed economic development environment. At the same time, the financial burden on the military was gradually reduced, and the U.S. economy gradually recovered; When interest rates were raised in 1999, the United States was in the period of rapid development of the information technology industry, and the economy was overheated, and the stock market also accumulated huge bubbles. When raising interest rates in 2004, stimulated by George W. Bush's plan of "blueprint of the American Dream" aimed at helping poor families buy houses, and superimposed the low interest rate at that time, the US real estate market began to develop rapidly, thus driving the rapid prosperity of the economy; When raising interest rates in 2015, the fundamentals of the U.S. economy were relatively weak, but the employment market was close to full employment, there was a certain upward pressure on wages, the real estate market was also recovering steadily, and although inflation was weak, there were some upward signs.
Background and path deduction of the current round of interest rate increase by the Federal Reserve
1) in terms of the monetary policy framework of the Federal Reserve, the ultimate goal of monetary policy, which has been used for many years, will shift from the "double target system" in which prices and output are equally important to the flexible "average inflation target system" in which employment is given priority. In terms of employment, we put employment before inflation in the policy objectives, paying attention not only to the total indicators, but also to the structural problems of employment; In terms of inflation, we seek to achieve an average inflation rate (PCE) of 2% over a period of time.
2) in terms of the fundamentals of the U.S. economy, the current U.S. economy has a good recovery momentum driven by demand. Manufacturing, retail sales, real estate, etc. have recovered to a large extent. After the epidemic has been controlled, service consumption is also slowly recovering. In 2021, GDP increased by 5.7% year-on-year, and the overall growth was at a good level. At the same time, the output gap continued to rise, and it was close to closing by the end of 2021. In terms of inflation, CPI rose 7.9% year-on-year in February, the highest in 40 years. Due to the impact of the conflict between Russia and Ukraine, the rising effect of energy and food prices caused by the US sanctions against Russia has not been fully reflected, and the peak of US inflation may not yet come. The high inflation of core services may lead to a relatively strong inflation level in the United States, which is difficult to fall back quickly. In terms of employment, the current U.S. employment market is very strong. In March 2022, the U.S. added 431000 non-agricultural jobs, and the employment of all races, nationalities and population groups increased. The "wage inflation spiral" continued to deduce. 3) In terms of the range of the Fed's current interest rate hike, the current macroeconomic background faced by the United States has less in common with the past six interest rate hike cycles. However, if we refer to the past, the macro environment faced by the current interest rate hike has the characteristics related to the two rounds of tightening in 1983 and 2015. It is expected that the interest rate hike range in this round may be slightly weaker than that in 1983, but stronger than that in the interest rate hike cycle in 2015. We expect the whole round of interest rate hike range between 250bp and 300bp; In terms of the pace of interest rate increase, it is expected to be fast before and slow after. The number and range of interest rate increase in 2022 will be more radical. It is expected to be between 4-5 times, of which the interest rate will be increased continuously from May to June, and the interest rate increase range may be 50bp in May, so as to speed up the contraction progress.
Will the United States usher in the "Volcker moment" again?
1) at present, the fundamentals of the US economy are strong, and raising interest rates will not trigger a short-term recession in the US economy. First, judging from the last six rounds of interest rate hikes in history, most recessions occurred between 1-2 years after the end of interest rate hikes, with an average of 14 months after the end of interest rate hikes; Second, the current US economic performance is strong, the output gap is close to closing, and there is a continuing upward trend. Although the relevant U.S. stimulus policies have been gradually withdrawn and interest rate hikes have begun, the short-term interest rate hike is limited, and the demand of U.S. residents will remain resilient. In the medium and long term, with the continuous and rapid interest rate increase of the Federal Reserve in 2022 and the slow decline of inflation, the demand and actual consumption capacity of U.S. residents will be gradually affected. Under the influence of the base effect, the U.S. economy may fall to a certain extent in 2023.
2) the upside down of the interest rate curve of 10-year and 2-year US bonds does not necessarily point to the economic recession. The interest rate difference between 10-year Treasury bonds and 3-month treasury bonds should be considered at the same time. When the upside down of the past two indicators occurred at the same time, the US economy declined on average 14.25 months after the upside down. We believe that the current upside down is due to the current high short-term inflation in the United States. The yield of two-year Treasury bonds will contain more inflation factors. The interest rate difference between 10-year Treasury bonds and three-month Treasury bonds, which can better reflect the changes of liquidity and monetary policy, is still 200bp, and there is a large deviation between the two; Second, the judgment of economic recession should pay more attention to the fundamentals of the U.S. economy. At present, the fundamentals of the U.S. economy are still strong and the short-term toughness is sufficient. The bond interest margin takes into account the judgment of more bond investors on the future economic policy and situation, and its causality is debatable. 3) Performance of various assets during the Fed's interest rate hike: for overseas assets, the performance of various assets during the US interest rate hike is relatively differentiated. U.S. stocks have certain adjustment pressure, the performance of U.S. bonds is different, the price of crude oil will generally continue to rise for a period of time after the first interest rate increase by the Federal Reserve, the price of gold is still relatively strong, and the dollar index has a short-term downward trend after the first interest rate increase.
Looking forward to the follow-up, we believe that:
U.S. stocks: from May to June, the Federal Reserve will raise interest rates more aggressively, and the pressure on U.S. stocks to adjust has not ended. After U.S. inflation peaked and the rate increase of the Federal Reserve slowed down, the trend of U.S. stocks will remain stable;
US Treasuries: in US Treasuries, with the rapid interest rate hike by the Federal Reserve driving the real interest rate upward, and considering the inflationary pressure caused by the conflict between Russia and Ukraine, there is still upward pressure on 10-year US Treasuries in the short term, or it will remain high. When inflation peaks, the downward space of US Treasuries will be opened;
Crude oil: in terms of crude oil, due to geopolitical factors and the influence of supply and demand, the short-term price will remain high and volatile, the subsequent supply will gradually increase, and the global demand will gradually slow down under the tightening cycle, and the crude oil price will fall;
Gold: in terms of gold, due to geopolitical factors and high global inflation in the short term, the gold price is expected to remain high, but the gold price will fall to a certain extent with the decline of inflation and the decline of risk aversion demand;
US dollar: in terms of the US dollar, there is certain upward pressure on the US dollar in the short term. Due to the conflict between Russia and Ukraine, the economic recovery process of Europe is expected to be greatly affected, and its economic growth is weaker than that of the United States, thus pushing the US dollar index upward.
For a shares, A-Shares performed differently during the Fed's interest rate hike. There was some adjustment pressure before the interest rate hike began, but the specific performance still depends on the situation in China. At present, the Fed's continued interest rate hike has a certain pressure on a shares, but we believe that under the continuous adjustment in the early stage, the risk factors brought by the Fed's tightening have been gradually digested. In the medium and long term, with the gradual implementation and effect of China's policies related to steady growth, China's economy will continue to be stable and positive, the pressure brought by the tightening of the Federal Reserve will gradually disappear, and the performance of A-Shares will also depend on China's economic fundamentals.
Risk tips
1. Higher than expected inflation caused by international tension: the continuous conflict between Russia and Ukraine has led to the continuous rise of international commodity prices and promoted the rise of global prices.
2. The covid-19 epidemic situation has deteriorated significantly: the emergence of new virus variants has led to a new round of blockade in the global economy, resulting in a sharp slowdown in economic activities.
